June 8, 2022: Responsible Financial Innovation Act 📜🇺🇸🏛
Lummis / Gillibrand Cryptocurrency Bill Sparks Cautious Optimism
Catch me this AM in a rare unscripted chat!
We read the early leaks. We waited for smarter individuals to give it a read through.
Overall, we’re in line with the emerging consensus: cautious optimism about the Lummis-Gillibrand bill to provide a regulatory framework for cryptocurrency.
It’s imperfect, as all things are. It’s likely to get tarnished by lobbyists in the path between here and passage.
Yet Lummis and Gillibrand had to jump an extremely high bar to produce legislation that was broadly palatable to an incredibly diverse and often angry group of stakeholders. They proved themselves up to the challenge. The Senators deserve exceptional praise for this release. It reflects comprehensiveness and attention to detail, and both should be lauded for their outstanding leadership on the subject.
Some deft cultural milestones as well. In a subtle wink towards the meme magicians, the bill clocked in at exactly 69 pages. We also saw Senator Lummis teaching herself to code in the process.
Am I fully satisfied with the bill? Of course not. But I sit at one extreme edge of the debate. I won’t be satisfied until court eunuch Gary Gensler is publicly humiliated, arrested, and frog-marched out of DC in shackles. I’m also pragmatic enough to recognize this won’t happen in the near future. I’m happy to shut up and take the W.
So let’s dive into the meat of this bill, with a emphasis on…
DeFi
Commodities vs. Securities
Taxes
Stablecoins
DAOs
Degen Rights
DeFi
Naturally I’m most interested in the possible effects on DeFi, in particular my beloved flywheel. At the high level, I’ll note that the Curve core team are not headquartered in the US. Curve is legally registered, fully compliant, and utterly comfy within Switzerland’s far clearer legal framework. The team monitors legal trends closely as you might imagine, but it ranks awfully low on their list of concerns.
That said, the bill is disappointingly underdeveloped in its treatment of DeFi and AMMs. The plan appears to be to punt this section to down the road, so the fight continues on this front.
Overall, the trendline is directionally positive. The best take on the potential effects on Curve/DeFi was from yesterday’s Market Capping podcast featuring Sam Kazemian. Kazemian pointed out only plausible attack vector on DeFi would be regulators moving over-aggressively, say by using USDC’s blacklist to prohibit interaction with a wide swaths of DeFi contracts. He notes there’s absolutely nothing in the overall bill to hint that such actions are within the Overton Window. Based on direction, he’s therefore elated.
ASIDE: The hour with Sam was a true delight. Big-brained discussion. Bespoke podcast name. Eleven out of ten would recommend.
Commodities vs. Securities
Bar none, the biggest problem with cryptocurrency regulation in America has been the SEC. With the space referred to as a Wild West, the SEC’s role is that of the corrupt sheriff patrolling Main Street and extracting extortion from honest merchants.
Nearly every successful US crypto company has found itself under the crosshairs of the SEC. As an American entrepreneur, you’d have to be insane to launch a company while being fully doxxed. Accordingly, all major development has moved overseas.
The bill doesn’t fully reverse the damage. In an ideal bill we’d see the SEC explicitly forbidden from any involvement with cryptocurrency, major reform to their disastrous “regulation by enforcement” policy, and a 95% defunding unless Hester Peirce was given the helm. However, we’re sure behind-the-scenes political considerations required the SEC keep a seat at the table.
Accordingly, the bill does a good job of clarifying the lines a bit as to what constitutes a security, explicitly excluding BTC and ETH (about which Gensler had inexcusably hemmed and hawwed).
The more balanced CFTC gains more power in the deal, including control over spot crypto markets.
The bill also provides a bit more clarity on the ambiguity around what constitutes a security. The SEC notably used this ambiguity to loosely imply everything was a security and enforce accordingly. Clarifying this ambiguity is a small win, even if it means their reign of terror will surely continue within the purview of what is classified as a security.
For the tokens that do get classified as a security, there’s hints of a flexible innovation framework. That is, the bill would require lighter reporting to the SEC that is onerous but at least possible for startups. In a positive development, the SEC appears to carry the onus of proving a digital asset is a security in court.
Big picture, the average degens may care little about overall regulatory issues, but big businesses interested in the space had to proceed far more cautiously. Most just sat on the sidelines citing “regulatory uncertainty.”
If this bill passes, it would largely remove this excuse. Whatever else you may have to say about legacy institutions joining crypto, it could represent a lot of money flowing into the space.
Taxes
The question of taxes has always been a tough one for the US. Overall taxes in the US are so absurdly high, often exceeding the deadly 50% threshold by the time the money flowed full-stream from printer to pocket. It’s a subject that requires broader overall reform, but the US empire is too sprawling and bankrupt to ever solve the problem.
So failing broader solutions, it’s worth embracing the deals within the legislation.
The biggest issue with crypto transactions in the US is that they require computing capital gains/losses on every transaction, an absurd amount of reporting for buying a steak at the market. This bill would exempt transactions under $200.
Of course, $200 soon won’t be enough to buy a tank of gas with inflation, so it would be helpful to push this value upwards, but it’s a good start. We have to imagine it’s a good deal for the IRS, which surely doesn’t want to deal with the paperwork that could be generated by every microtransaction.
There’s also a fix to tax provisions tacked onto the prior infrastructure bill:
For Bitcoin miners there’s also some fixes to allow them to be taxed only when it’s sold, which is a common-sense adjustment.
Stablecoins
The bill here mostly focuses on depository stablecoins, which mostly does not affect the typical degen. If you want to do like USDC and hold dollars in a bank account and mint a token, the requirements are now outlined in explicit detail.
The bill does little to even address algorithmic stablecoins, which is arguably a good thing. Importantly, it appears to take little action to explicitly enact any prohibitions against non-depository stablecoins. This means FRAX is unlikely to find itself in the crosshairs anytime soon. As Sam pointed out in the aforementioned podcast, it’s generally a good thing if the trendline is in the direction of more stablecoins.
DAOs
The treatment of Decentralized Autonomous Organizations (DAOs) is a bit confusing and borders on hostile.
One presumes that this treatment of DAOs somewhat reflects Lummis’s home state bias. Last year, Wyoming trailblazed a unique legal recognition for DAOs. Should DAOs be pressured to incorporate, Wyoming could find itself poised to become the new Delaware of DAOs: the de facto destination for registration in the US.
Although we are overall a fan of Lummis’s work on this bill, we’d recommend this section merits more serious consideration and a redraft.
Degen Rights
By far, one of the biggest wins for users in this bill is to enshrine the right to self-custody. Earlier this year we saw anti-crypto tyrants like Trudeau bully Coinbase and Kraken for educating users on the utility of self-custody. Explicitly declaring this a right goes a long way toward protecting the promise of cryptocurrency for consumers.
Ultimately we’d like to see more protection of consumer rights at this formative stage. If the US seeks to become a hub for cryptocurrency, (which we believe is key to our national survival), we can get there far more effectively by outlining rights as opposed to imposing regulations. Rights are stickier, and tougher to take away once established.
Here is but one example of what a cryptocurrency bill of rights could look like:
One reason to push for an emphasis on consumer rights now is that the bill is likely to face a long road to passage. Pro-crypto lobbyists are largely funded by the major crypto companies. Organizations focused on small fish like PAC DAO don’t yet have sufficient influence to blunt their effects. One can easily imagine how big businesses may want to shield their incumbent advantage at the expense of smaller upstarts.
We know there will be significant efforts to keep rewriting the bill between now and passage. Given that the Terra collapse was a major impetus for pushing regulation, we could imagine subsequent rewrites take a more negative tone.
Cryptocurrency rights are human rights. Nations that recognize this fact will win.
Conclusion
This covers most key points, but it’s a massive bill and we surely missed a lot.
Many of the subjects we glossed over merely took the form of requesting studies be generated. We don’t care strongly about government studies. They’re typically a waste of taxpayer money, but if feeding some bureaucrats is the compromise we need to accept to get thoughtful legislation enacted, we’ll take it.
As mentioned, the bill is a work in progress. Observers don’t expect action until next year. This may be a bit of a blessing, as the composition of Congress is likely to see Democrats lose some power. We’re non-partisan and opposed to both political parties. Yet we note that although the younger crop of Dems like Ritchie Torres and Jake Auchincloss are generally pro-crypto, a lot of fervently anti-crypto fossils like Elizabeth Warren hold disproportionate sway within the party.
Therefore, seeing Democrats relegated to the minority marks a tactically easier path towards a more productive bill. We imagine as Democrats architect their post-drubbing comeback, they’ll put more emphasis on the younger generation’s more popular viewpoints like embracing cryptocurrency.
Again, we’re not partisans. Our hope is to finally arrive at the point where we started: cryptocurrency is not a partisan issue.
In addition to the threads mentioned throughout, here are a few other articles you can read on the subject:
https://gillibrandny.medium.com/the-responsible-financial-innovation-act-218a764abd6c
https://bitcoinmagazine.com/business/us-senators-discuss-highly-anticipated-bitcoin-bill
https://cryptonews.net/news/regulation/7232751/(Update: this has been confirmed incorrect)
Let us know your thoughts on anything we missed in the comments!
Kindly explain: Curve is situated in the CH regulatory environment? How so? Isn't Curve and defi in general situated comfortably in the area just outside any jurisdiction or regulatory environment? (theoretically, anyway)?
this is great work, thanks!